The usual pre-Budget meetings with the Finance Minister kicked off last week, with the Budget presentation barely a month-and-a-half away. Among the first groups to meet Arun Jaitley were farmer organisations and farm sector experts.
Farm loan waivers topped their wish list, which also included a minimum income guarantee scheme, higher support prices for farm produce, and crop insurance.
Now, there is near unanimity among economists, media and other commentators over the ill-effects of farm loan waivers. Ever since the farmers’ protests erupted in the middle of this year, State governments have been quick to waive farm loans. States ruled by the BJP — Uttar Pradesh, Maharashtra — as well as the Congress — Punjab — have taken this option for ostensible political reasons.
Against the waivers
The erstwhile UPA government waived farm loans in the 2008 Budget, which played a major part in its election victory in 2009.
Recently, at the Inclusive Finance India Summit 2017 in the Capital, two former RBI Governors spoke about the adverse effects of farm loan waivers.
YV Reddy said, “Loan waiver is not good for economic or credit culture. Every political party in India has given farm loan waiver in some State or the other or at all India level. So ultimately, it is a political decision. It cannot be justified in the longer run.”
C Rangarajan suggested a waiver of interest rate payment in years of distress and then longer repayment schedule. He said loan waiver must be the last resort of governments.
Even agriculture experts such as Ashok Gulati have been against this move.
But are farm loan waivers really such a bad policy option?
The counter view
There is an interesting counter view offered by Pronab Sen, former Chief Statistician of India.
In an article published in June (when the farmer agitations were raging across India) in the website ‘Ideas for India’, Sen argued that there was no empirical evidence to suggest that farm loan waivers led to either erosion of credit culture or a greater moral hazard. Moral hazard is a situation where people become prone to reckless borrowing behaviour, knowing full well that the risk is borne by someone else — usually the government.
Sen asks two important questions. One, what will happen if farm loan waivers are not granted; and two, are farm loan waivers a symbol of political populism or ‘a more fundamental problem in the design of farm loans in India’?
To the question of whether a demand for farm loan waivers are a symptomatic of a worsening credit culture, Sen’s answer is no. Farm loans have built-in provisions where, in years of drought and agriculture distress, the Centre allows for rolling over of loans, which permits easier repayment options. Of course, this is not a blanket provision and is subject to conditions.
Act of State
Sen argues that 2016-17 is a different case as the year was not preceded by a drought. He squarely blames demonetisation for the farmers’ distress, saying this policy move starved farmers of crucial liquidity across the country.
He says, “This is not a case of weakening credit culture or of moral hazard. It is the outcome of the simple fact that while the government is willing to provide for ‘acts of God’, it is not willing to do so for an ‘act of State’ or force majeure. If anything, the State is in denial.”
The counter-factual
Now to the other important question — the counter-factual — what happens if farm loan waivers are not given? There are two aspects here — one is the financial implications for the Centre and the other is the impact on farmers.
Sen says in case of large scale loan defaults by farmers in situations of acute agricultural distress, there is no loss to the banks that provide the loans, as they are insured by the Agricultural Insurance Company (AIC). But this company is seriously under-funded and in case of large scale loan defaults, the Centre will have to provide funds to the AIC, which will come from the tax payer with its impending fiscal consequences.
Sen makes two important points here. One: ‘Loan waivers are borne by States, defaults are borne by the Centre’. Two: In case of defaults, farmers have to suffer serious consequences such as loss of collateral (land and other assets) and being blacklisted by banks for future loans.
So the consequences of a loan default are not just ethical but have an economic angle too. Given the shift away from ‘subsistence agriculture’ and increasing focus on diversification and ‘commercialisation’ of Indian agricultural in the last two decades, farmers have had to take on greater risks.
A new model
Sen argues that shutting them out of formal institutional lending will impact agriculture production, lead to increasing food inflation and tighter monetary policies. You can already hear the corporate sector crying out for rate cuts.
He points out at the ‘asymmetry’ at work here — where the welfare of farmers is the States’ concern but the health of banks is the Centre’s problem.
The way out of this conundrum, according to Sen, is for the Centre and the States to sit together in the spirit of cooperative federalism and ‘evolve a farm loan model which protects both the farmers and the banks without bringing politics into it’.
Given that a large number of States are ruled by the BJP, this course of action also makes eminent political sense for the Modi-government at the Centre.